Honduras - Macroeconomic Trends

Macroeconomic trends

Honduran president Rafael Leonardo Callejas Romero, elected in November 1989, enjoyed little success in the early part of his administration as he attempted to adhere to a standard economic austerity package prescribed by the International Monetary Fund (IMF) and the World Bank. As the November 1993 presidential elections drew closer, the political fallout of austere economic measures made their implementation even less likely. Any hope for his party's winning the 1993 election was predicated on improving social programs, addressing employment needs, and appeasing a disgruntled, vocal public sector. However, reaching those goals required policies that moved away from balancing the budget, lowering inflation, and reducing the deficit and external debt to attract investment and stimulate economic growth.

Callejas inherited an economic mess. The economy had deteriorated rapidly, starting in 1989, as the United States Agency for International Development (AID) pointedly interrupted disbursements of its grants to Honduras to signal displeasure with the economic policies of the old government and to push the new government to make economic reforms. Nondisbursal of those funds greatly exacerbated the country's economic problems. Funds from the multilateral lending institutions, which eventually would help fill the gap left by the reduction of United States aid, were still under negotiation in 1989 and would be conditioned first on payment of arrears on the country's enormous external debt.

Between 1983 and 1985, the government of Honduras--pumped up by massive infusions of external borrowing--had introduced expensive, high-tech infrastructure projects. The construction of roads and dams, financed mostly by multilateral loans and grants, was intended to generate employment to compensate for the impact of the regionwide recession. In reality, the development projects served to swell the ranks of public-sector employment and line the pockets of a small elite. The projects never sparked private-sector investment or created substantial private employment. Instead, per capita income continued to fall as Honduras's external debt doubled. Even greater injections of foreign assistance between 1985 and 1988 kept the economy afloat, but it soon became clear that the successive governments had been borrowing time as well as money.

Foreign aid between 1985 and 1989 represented about 4.6 percent of the gross domestic product (GDP). About 44 percent of the government's fiscal shortfall was financed through cash from foreign sources. Side effects of the cash infusion were that the national currency, the lempira became overvalued and the amount of exports dropped. A booming public sector, with its enhanced ability to import, was enough to keep the economy showing growth, based on private consumption and government spending. But the government did little to address the historical, underlying structural problems of the economy--its overdependence on too few traditional commodities and lack of investment. Unemployment mushroomed, and private investment withered.

By 1989 President Callejas's broad economic goal became to return Honduran economic growth to 1960-80 levels. During the decades of the 1960s and 1970s, the country's economy, spurred mostly by erratically fluctuating traditional agricultural commodities, nevertheless averaged real annual growth of between 4 and 5 percent. At the end of the 1980s, however, Callejas had few remaining vehicles with which to pull the country out of the deep regionwide recession of the 1980s. Real growth between 1989 and 1993 translated to mostly negative or small positive per capita changes in the GDP for a population that was growing at close to 4 percent annually.

President Callejas attempted to adhere to conditions of desperately needed new loans. Cutting the size of the public sector work force, lowering the deficit, and enhancing revenues from taxes--as mandated by the multilateral lending institutions--were consistently his biggest stumbling blocks. Despite his all-out effort to reduce the public-sector deficit, the overall ratio of fiscal deficit to the GDP in 1990 showed little change from that in 1989. The total public-sector deficit actually grew to 8.6 percent of the GDP, or nearly L1 billion, in 1991. The 1993 deficit expanded to 10.6 percent of the GDP. The Honduran government's medium-term economic objectives, as dictated by the IMF, were to have generated real GDP growth of 3.5 percent by 1992 and 4 percent by 1993. In fact, GDP growth was 3.3 percent in 1991, 5.6 percent in 1992, and an estimated 3.7 percent in 1993. The economy had operated so long on an ad hoc basis that it lacked the tools to implement coherent economic objectives. Solving the most immediate crisis frequently took precedence over long-term goals.

Unemployment

Between 1980 and 1983, 20 percent of the work force was unemployed--double the percentage of the late 1970s. Job creation remained substantially behind the growth of the labor force throughout the 1980s. Unemployment grew to 25 percent by 1985, and combined unemployment and underemployment jumped to 40 percent in 1989. By 1993, 50 to 60 percent of the Honduran labor force was estimated to be either underemployed or unemployed.

The government's acceptance of foreign aid during the 1980s, in lieu of economic growth sparked by private investment, allowed it to ignore the necessity of creating new jobs. Honduras's GDP showed reasonable growth throughout most of the 1980s, especially when compared to the rest of Latin America, but it was artificially buoyed by private consumption and public-sector spending.

Mainstay agricultural jobs became scarcer in the late 1970s. Coffee harvests and plantings in border area decreased because fighting in neighboring Nicaragua and El Salvador spilled over into Honduran. Other factors contributing to the job scarcity were limited land, a reluctance on the part of coffee growers to invest while wars destabilized the region, and a lack of credit. Small farmers became increasingly unable to support themselves as their parcels of land diminished in size and productivity.

Problems in the agricultural sector have fueled urbanization. The Honduran population was 77 percent rural in 1960. By 1992 only 55 percent of the Honduran population continued to live in rural areas. Campesinos have flocked to the cities in search of work but found little there. Overall unemployment has been exacerbated by an influx of refugees from the wars in neighboring countries, attracted to Honduras, ironically, by its relatively low population density and relative peace. In the agricultural sector (which in 1993 still accounted for approximately 60 percent of the labor force), unemployment has been estimated to be far worse than the figures for the total labor force.

Honduran urban employment in the early 1990s has been characterized by underemployment and marginal informal-sector jobs, as thousands of former agricultural workers and refugees have moved to the cities seeking better lives. Few new jobs have been generated in the formal sector, however, because domestic private sector and foreign investment has dropped and coveted public-sector jobs have been reserved mostly for the small Honduran middle-class with political or military connections. Only one of ten Honduran workers was securely employed in the formal sector in 1991.

In the mid-1980s, the World Bank reported that only 10,000 new jobs were created annually; the low rate of job creation resulted in 20,000 people being added to the ranks of the unemployed every year. The actual disparity between jobs needed for full employment and new jobs created exceeded that projection, however. For those with jobs, the buying power of their wages tumbled throughout the 1980s while the cost of basic goods, especially food, climbed precipitously.

Inflation

By 1991 President Callejas had achieved modest success in controlling inflation. Overall inflation for 1990 had reached 36.4 percent--not the hyperinflation experienced by some Latin American counties--but still the highest annual rate for Honduras in forty years. The Honduran government and the IMF had set an inflation target of 12 percent for 1992 and 8 percent for 1993. The actual figures were 8.8 percent in 1992 and an estimated 10.7 percent for 1993. Hondurans had been accustomed to low inflation (3.4 percent in 1985, rising to 4.5 percent by the end of 1986), partly because pegging the lempira to the dollar linked Honduras's inflation rate to inflation rates in developed countries. But the expectation for low inflation made the reality of high inflation that much worse and created additional pressures on the government for action when inflation soared in 1990.